Four entrepreneurial students want to open a shaved ice business during the coming summer. Maxine thinks that demand will be high and therefore they should purchase a large stand and acquire a premium ice shaving machine. Minnie feels strongly that demand will be low and that they should purchase a tarp and some basic hand tools to work the ice. Midelia is pretty sure that demand will fall in-between these two extremes, so they can get by with a shack and a used ice shaving machine. Their financial wizard of the bunch, Probableah, has estimated the costs, revenues, and likelihoods of each level of demand and created the table shown below. What is the expected profit for this venture? $$\begin{array} { | l | c | c | c | }
\hline { \text { Demand } } & \text { Total Revenue } & \text { Total Expenses } & \text { Probability } \
\hline \text { Low } & \$ 500 & \$ 15 & .2 \
\hline \text { Medium } & \$ 2,000 & \$ 125 & .3 \
\hline \text { High } & \$ 5,000 & \$ 519 & .5 \
\hline
\end{array}$$
A)$1700
B)$2300
C)$2900
D)$3300

Question

Four entrepreneurial students want to open a shaved ice business during the coming summer. Maxine thinks that demand will be high and therefore they should purchase a large stand and acquire a premium ice shaving machine. Minnie feels strongly that demand will be low and that they should purchase a tarp and some basic hand tools to work the ice. Midelia is pretty sure that demand will fall in-between these two extremes, so they can get by with a shack and a used ice shaving machine. Their financial wizard of the bunch, Probableah, has estimated the costs, revenues, and likelihoods of each level of demand and created the table shown below. What is the expected profit for this venture? $$\begin{array} { | l | c | c | c | } 
\hline  { \text { Demand } } & \text { Total Revenue } & \text { Total Expenses } & \text { Probability } \
\hline \text { Low } & \$ 500 & \$ 15 & .2 \
\hline \text { Medium } & \$ 2,000 & \$ 125 & .3 \
\hline \text { High } & \$ 5,000 & \$ 519 & .5 \
\hline
\end{array}$$
A)$1700
B)$2300
C)$2900
D)$3300

Quizplus · Accepted Answer

To calculate the expected profit, we multiply the profit for each level of demand by its probability and sum these products. Profit is calculated as Total Revenue minus Total Expenses for each demand level.- For Low Demand: Profit = $500 - $15 = $485. Expected Profit = $485 * 0.2 = $97.- For Medium Demand: Profit = $2000 - $125 = $1875. Expected Profit = $1875 * 0.3 = $562.5.- For High Demand: Profit = $5000 - $519 = $4481. Expected Profit = $4481 * 0.5 = $2240.5.Adding these expected profits together: $97 + $562.5 + $2240.5 = $2900.

Four Entrepreneurial Students Want to Open a Shaved Ice Business